Deficit reduction could hit homeowner write-offs

Mortgage interest deductions, capital gains exclusions and other tax benefits could be targeted as lawmakers look at ways to increase revenue and cut spending.

Reporting from Washington — Just because President Obama's latest budget proposal calls for rollbacks in mortgage interest deductions solely for high-income taxpayers, should you assume that all of your write-offs as a homeowner are secure from attack?

Absolutely not. Those tax benefits — including capital gains exclusions and home equity and second-home interest deductions — might be more vulnerable to broad-based cutbacks during the next two years than at any time in decades.

An influential, bipartisan group of lawmakers on Capitol Hill — led by a "gang of six" in the Senate — is drafting a legislative framework that would essentially seek to implement much of the president's deficit-reduction commission report released in December. The legislation would set annual targets for higher revenues and lower spending in multiple budget categories, and would impose automatic, severe cuts if Congress did not hit those targets. Congress would have two years to figure out how and where to make the required reductions.

Durbin and Conrad were members of the commission. Both voted to approve the final report, which called for $1.7 trillion in federal discretionary spending cuts and $180 billion in tax revenue increases over the coming 10 years. The commission said across-the-board trimming of spending and tax benefits would be necessary to control the wildfire national debt, now more than $14 trillion and rising. The debt is projected to exceed 90% of the country's gross domestic product by 2020 if left on its current path.

Among the tax expenditures the commission specifically targeted were the annual breaks that flow to homeowners, including mortgage interest write-offs for first and second homes, deductions for home equity lines and second mortgages, property tax write-offs, and the $250,000 and $500,000 capital gains exclusions for single and married taxpayers who sell their houses at a profit.

President Obama praised the broad goals of the commission but included only a relatively small cutback in mortgage interest write-offs — a 28% deduction cap on write-offs by single taxpayers with incomes higher than $200,000 and married taxpayers earning more than $250,000 — in his budget proposal for the upcoming fiscal year.

The legislative draft, which is expected to be circulated to senators in March, already is controversial. For example, Sen. Charles E. Schumer (D-N.Y.) reportedly is demanding that Social Security changes be exempt from the plan. But members of the drafting group disagree and argue that, to be effective and fair, no major budget-related items — no matter how politically sensitive — can be omitted.

"Everything has to be on the table," Coburn said. "There can be no sacred cows and pet priorities."

As to tax code changes, Durbin said the only way to reduce the deficit was to "ensure that everyone pays their fair share.... We need to look at the money we forgo every time we hand out a new tax break. These 'tax expenditures' cost the Treasury as much as we spend in appropriations each year with much less oversight."

What's on the line for housing and homeowners, whose write-offs have been widely assumed to be politically untouchable? Big money by any measure. According to the latest estimates prepared by the congressional Joint Committee on Taxation, the mortgage interest deduction will cost the government $99.8 billion in uncollected taxes this fiscal year and $107.3 billion in fiscal 2012. Homeowner property tax write-offs will cost $26.6 billion in uncollected taxes this year and $31.6 billion in 2012. The $250,000/$500,000 tax-free exclusions on capital gains for home sale profits are projected to cost the Treasury about $19 billion this year and $21 billion next year.

However, no one anticipates that these benefits can be eliminated or even severely slashed within a couple of years.

Although housing trade groups have not yet spoken out about the plan being drafted in the Senate, they privately worry that because of the sheer size of the national debt, leaders from both parties could conceivably join with the president to structure some form of grand debt-reduction compromise requiring all special interests to chip in.

"We definitely take this seriously," said Rob Dietz, an economist and tax specialist for the National Assn. of Home Builders. "We are going to have to continue to make the case for housing, and remind [Congress] just how important housing is to the economy."